P&G crosses excise hump, concerns stay

Procter and Gamble Hygiene and Health Care Ltd’s (P&G Hygiene) share price has risen by 14% since the budget, after the government lowered excise duties on sanitary napkins.

This segment accounted for about 60% of sales in the year ended June, with the rest coming from the Vicks range of cough and cold products.

The government reversed the previous year’s budget levy of a 10% excise duty on sanitary napkins and brought it down to 1%. Last year’s levy led to a sharp increase in expenses and was also one of the main reasons for the share’s underperformance.

The company’s shares, in fact, are still down by 24% compared with its year-ago levels. During the same period, the CNX FMCG Index of the National Stock Exchange has risen by about 21%.

In the six months ended December, excise amounted to Rs20 crore, against nil in the year-ago period. P&G Hygiene’s pre-tax profit fell by 41% to Rs98 crore, but the higher excise duty wasn’t the only reason for this.

Profit would have declined by 29% even without the hike in duty. Raw material and packaging costs rose by nearly 22%. Also, advertising and promotion expenses rose by a sharp 59%. Both the segments the company operates in are competitive.

In the Vicks segment, the company needs to keep up visibility due to a proliferation of competitors, while for sanitary napkins, P&G Hygiene has to invest to grow in the under-penetrated market.

Of course, the excise hit is in the past now. Lower excise duties will reflect in better margins, partly in the March quarter, and fully from the June quarter. But a bigger worry should be slower growth in revenue.

One reason behind this is lower realizations in sanitary napkins, due to a changing product mix and its attempts to grow the market. In September, the company had also reported supply issues affecting sales of Vicks, which seem to be continuing in December.

The next few quarters will show if there is let-up in any of these. The base effect of price realizations in sanitary napkins will disappear, and if volume growth steadies, sales growth will improve as well.

The stock trades at over 44 times its trailing 12 month earnings per share. If its earnings were to go up, say by about 20%, due to the excise exemption, its price-earnings multiple would decline to about 37 times. That is still expensive, unless the other concerns get resolved.